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Investment Adviser to Pay $6 Billion to Resolve Fraud Charges

The DOJ and SEC charged a subsidiary of an international investment adviser with defrauding investors by concealing billions of dollars of losses and misrepresenting downside risk in connection with a series of hedge funds that collapsed in March 2020. Three portfolio managers were also charged with various offenses, including obstruction of justice, for their role in the alleged fraudulent scheme.

In parallel civil and criminal actions filed in the Southern District of New York, the SEC and the DOJ alleged that the adviser misled investors by repeatedly and falsely claiming that it was employing a hedging strategy that would protect against market crashes. The Complaints alleged that the relevant funds were actually purchasing less expensive hedges that exposed investors to significantly more risk. The funds were able to solicit commitments of approximately $11 billion and generated $550 million in fees for the adviser.

Following the severe market impacts of COVID-19, the funds lost billions of investor dollars and were ultimately shut down. The SEC and the DOJ alleged that, prior to the funds failing, the portfolio managers manipulated various reports in order to obscure the funds' ongoing losses. The managers were also charged with lying to SEC staff when the agency initiated an investigation into the collapse of the funds.

The SEC alleged that the adviser and its principals violated Section 17(a) of the Securities Act, Section 10b-5 of the Exchange Act and SEA Rule 10b-5 ("Employment of manipulative and deceptive devices"). In addition, the SEC found that the adviser violated Sections 206(1), 206(2) and 206(4) ("Prohibited transactions by investment advisers") of the Investment Advisers Act as well as Advisers Act Rule 206(4)-8 ("Pooled investment vehicles").

To settle the civil charges, the adviser agreed to (i) a cease-and-desist order, (ii) a censure and (iii) pay $315.2 million in disgorgement, $34 million in pre-judgement interest and $675 million in civil penalties. A portion of the civil penalty is to be paid as restitution to the victims. To settle the criminal charges, the adviser agreed to (i) plead guilty to the charges and (ii) pay $3 billion in restitution, $2.3 billion in criminal penalties and a $463 million forfeiture to the government. As a result of the guilty pleas, the adviser is disqualified from providing advisory services to U.S. registered investment funds for the next ten years.


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